Here’s a radical thought experiment. Imagine the US federal government is working as it did in the 20th century. What would Washington do to revive the fortunes of America’s dying cities? For every post-industrial turnround story, such as Pittsburgh, there are a dozen Youngstowns, Garys and Clevelands that are continuing to sink. My answer to that question is infrastructure, infrastructure, infrastructure, followed by training, affordable college, federal research and development drives and so forth. Plus more generous social insurance. All of which would necessitate higher taxes. There is no such thing as a free post-industrial revival; but it would be worth every penny. The more the US neglects its hinterlands, the greater the populist reaction, which in turn further paralyses Washington’s ability to act. We know this vicious cycle too well. In the absence of such policies, all we have to work with are the opportunity zones that were included in Donald Trump’s tax cut 18 months ago.
Every year the Financial Times is the media partner to the Chicago Council on Global Affairs for its annual forum on global cities. One of the biggest focuses this year has been on the left-behind cities. It was my role to moderate discussions about failing cities with Steve Case, of AOL fame, Bruce Katz, who has written about the new localism, Nan Whaley, the mayor of Dayton, and others. The first two are big fans of so-called O-zones. Put simply, investors who put money into economically deprived areas receive tax breaks, which get more generous the longer they keep their money in. Both Case and Katz argued vigorously that O-zones would stimulate activity in deprived cities. I am not so sure. My understanding is that businesses generally close down because of a lack of demand for their products. If an investment is worth it, the tax rate makes little difference. If the investment isn’t worth it, lower taxes won’t change their calculus. Silicon Valley’s companies pay some of the highest corporate taxes in America (not to mention putting up with California’s notoriously complex state regulations). The reason they don’t move to a lower tax state is because Silicon Valley is where they can find people, money and ideas.
I have never started a company, let alone one that invented a new way of life. So I bow to Case’s experience. Nor can I emulate Katz’s voluminous knowledge of what makes cities work. I also applaud Case’s drive to find businesses worth backing outside of the three areas (Silicon Valley, New York City and Boston) that take more than three quarters of all-American venture capital funding. But I’m still sceptical of the O-zones. Cities that have turned around tend to have one of two advantages. The first has a big anchor institution, such as a large university, which works with local government to create an attractive climate for investors. Pittsburgh (pictured above) fits into this category. The second has a sugar daddy — a local billionaire — who pours his money into reviving the city. Dan Gilbert, owner of Quicken Loans, has done this for downtown Detroit. The Devos family have done it for Grand Rapids, Michigan. It is hard to think of any revived cities that have not had one of those big advantages. The frustrating thing is that the US is awash with capital that could be channelled into reviving the country’s infrastructure. As Katz observed, much of middle America is not even second world in terms of infrastructure — “it’s more like third or fourth world”, he said.
President Trump has now had seven “infrastructure weeks”. Each time he announces one, something hijacks it (usually Trump himself). The first in June 2017 was bumped by Trump’s firing of James Comey as FBI director. Trump also torpedoed his most recent one last month when he stormed out of a meeting with Nancy Pelosi, speaker of the House of Representatives, and Chuck Schumer, Democratic leader in the Senate, after three minutes. The president told reporters he could not work with Democrats while they were investigating him. Here is another radical thought: Trump holds his eighth infrastructure week and sticks to the script. He would find it remarkably easy to get Democratic party support for a big investment package. If they failed to support it, he would find it remarkably easy to win the politics by painting them as a do-nothing Congress. Either way — hopefully the first — he wins. In the meantime, all we have to work with is the O-zone. Rana, am I being too negative about the transformative potential of tax breaks?
- My column this week warns Democrats of the dangers of over-reach on social issues — in this instance gender identity. “The more Trump demonises minorities, the more liberal America shifts leftward, which in turn boosts his politically incorrect allure,” I write. Just to be clear: I support transgender rights. But I think Democratic presidential candidates should tread carefully. The worst thing that could happen to transgender Americans is a second Trump term.
- My colleague Martin Wolf is on Spenglerian form with his latest column on the coming century of US-China conflict. The right way to handle China’s rise, he says, is a judicious blend of co-operation and competition. Alas, Washington is in no mood for walking and chewing gum at the same time. “Today’s attack on China is the wrong war, fought in the wrong way, on the wrong terrain,” Martin concludes.
- Finally, The New York Times has an interesting report on how Democratic candidates are walking a fine line between calling for tougher regulation of Silicon Valley while also holding a lot of fund raisers at the home of big tech titans . . . The three most prolific ones are Kamala Harris (a San Francisco local), Peter Buttigieg and Cory Booker. If any of their candidacies take off, this will come back to haunt them.
Rana Foroohar responds
Ed, I am a big believer in O-zones, but I don’t think the “opportunity” comes so much from tax breaks as from a combination of local city fathers (or mothers) with a vested interest either personally or for their businesses in seeing a particular city revived. I’ve seen this movie so many times, and while tax breaks might help at the margins, it’s usually about some group of enlightened city leaders deciding to capitalise on resources that they can see, but others can’t — yet. In the case of Gilbert, it was seeing that Detroit’s property values would eventually rise from nothing, and that he could get a better pool of labour by building luxury condominiums in downtown Motown for millennials than in trying to get the kids to live in the suburbs. Columbus, Ohio, which I’ve written about many times, is the classic example of a bunch of smart politicians and business leaders connecting the dots to create growth. These people would have done this with or without tax incentives (in fact in Columbus, the city did a tax rise to get the money to create the better services that kept business there). If it sounds a lot like industrial policy, that’s because it is — and national politicians on both sides of the aisle are starting to espouse it for the country at large, a topic I’ll cover in my own column on Monday.